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Tax-Aware Long-Short

Tax-aware long/short AUM update "rampant growth"

Could tax-aware long/short supplant direct indexing as SMA darling?

Brent Sullivan· · 2 min read
Cartoon charting the rampant AUM growth of tax-aware long/short as it challenges direct indexing for SMA dominance
Steven Belledin art for Wizards of the Coast

Tax-aware long/short AUM update “rampant growth”

At Nuveen/Brooklyn’s nPowered conference in Manhattan earlier this week, all advisers wanted to talk about with me was tax-aware long/short.

The two-sentence explainer of tax-aware long/short is core public equity exposure with roughly market-neutral margin and short portfolio complements. The strategy generally aims for pretax alpha and substantial realized losses.

I’ve written maybe 20 articles on tax-aware long/short exploring various nuances.

Tax-aware long/short is generally available in the following flavors:

  • Separate account vs. limited partnership/hedge fund
  • Low leverage (e.g. 110/10) to high leverage (e.g. 300/200 and more)
  • High/calibrated tracking error vs. low/incidental tracking error
  • Beta vs. market neutral

The “right” solution depends on family circumstances, risk tolerance, and the problem to be solved. Notable cases:

  • Tax-neutral divesting of concentrated public equity positions
  • Post-exit alpha and tax smoothing
  • Alpha and cumulative losses for transitioning between strategies
  • Many, many more use cases

Tax-aware long/short is an incredible planning tool.

It might not solve all problems - investors/advisers should carefully weigh their circumstances to make sure there’s a fit - but the AUM growth (below) reveals that advisers are smitten.